Why Singapore homebuyers willingly absorbed the residential price hikes
Residential properties are believed to be a hedge against inflation.
Notwithstanding the higher Additional Buyer’s Stamp Duty (ABSD) rates for Singaporeans buying their second home (from 12% to 17%) and foreigners (from 20% to 30%), global events have overtaken these developments.
According to Savills, the zero-COVID policy in China and the war in Ukraine has severely disrupted and dislocated supply chains, leading to sharp commodity price increases. All these have made investing in residential properties an attractive proposition. On the inflation front, its impact on residential real estate has been both direct and indirect.
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The direct effect is one where construction costs have to be passed to buyers. The BCA tender price index shows that construction costs for non-landed private residential properties have risen by 17% from Q4/2019 to Q4/2021.
However, in currency terms, the construction cost for a Good Quality Condominium has risen from a range of S$3,350 to S$4,300 psm in Q4/2019 to S$4,000 to S$5,200 psm in Q4/2021, an increase of 19.4% to 20.9%. In some cases, the construction costs for non-landed properties have gone up by more than a third over a two-year period. Alongside moderate increases in land costs, developers have had to transfer these costs to the buyers. So far, the latter have been willing to pay for these cost-pushes.
The question is why potential buyers have been willing to absorb and in fact more than absorb the cost increases could be attributed to firstly, ample savings of Singapore citizens and PRs, higher income levels of professionals in the in-demand sectors (the median starting salaries of fresh graduates in the information and digital technologies courses have risen by 13.6% from 2019 to 2021) and finally the belief that residential properties are a hedge against inflation.
On the point about residential properties being a hedge against inflation, the price increases of both public and private residential properties have outperformed local core inflation. Optically, it is plain to see that whether one breaks up the time series into blocks of 10 years, from 1990-2000, 2001-2010 and 2011-2021, residential price increases have been beating inflation.
This decades-long behaviour will not have gone unnoticed by the market and is ingrained in the national psyche. With global inflation expected to persist for the rest of 2022, the yearning to hedge against it using residential properties will remain strong, despite expectations that interest rates are expected to rise further.
Other than savings and higher incomes, the other reason why the market has so far been immune to hitherto and expected rate hikes is that the Total Debt Servicing Ratio (TDSR) had used a notional 3.5% mortgage rate to compute mortgage quantum and tenure. From the start of 2021 to 20th May 2022, the 1-month and 3-month compounded Singapore Overnight Offer Rate rose by just 0.5% and 0.29% to 0.75% and 0.46% respectively. Adding on the spread, what mortgagors are effectively paying is still around 1.5% to 1.6%. For two to three-year fixed rates, it is about 2.2% to 2.6%. Compared to the 3.5% TDSR rate, the gap is still very wide.
Despite all the challenges, the private residential market is functioning as it should. With equity and bond prices moving down in sync and cash losing value in the high inflationary environment, it appears that there is no alternative other than to buy residential properties. Therefore, unless further downside risks materialise, for instance, another set of government measures to cool demand or a serious deterioration in market conditions (depression rather than stagflation), we believe prices in 2022 could rise by 7% YoY.